Retaining and Increasing the Value of Customers – Demand Generation Know How from Panovus

To retain and increase the value of customers, you have to engage them by communicating on a regular basis. If you don’t, customers will be less loyal and either abandon you for a competitor who communicates with them, or will spend less with you over time. 

We know that planning for new business includes data management but continual retention management necessitates a co-ordinated approach

Customer Retention
Customer Retention marketing is a tactically-driven approach based on customer behavior. It’s the core activity going on behind the scenes in Relationship Marketing, Database Marketing, Permission Marketing, 1-to-1 Marketing, and so forth. Here’s the basic philosophy of a retention-oriented marketer:

1.  Past and Current customer behavior is the best predictor of Future customer behavior.
Think about it.  In general, it is more often true than not true, and when it comes to action-oriented activities like making purchases and visiting web sites, the concept really shines through. We are talking about actual behavior here, not implied behavior. Being a 35-year-old woman is not behavior; it’s a demographic characteristic.

Take these two groups of potential buyers who surf the ‘Net:

  1. People who are a perfect demographic match for your site, but have never made a purchase online anywhere.
  2. People who are outside the core demographics for your site, but have purchased repeatedly online at many different web sites.

If you sent a 20% off promotion to each group, asking them to visit and make a first purchase, response would be higher from the buyers (second bullet above) than the demographically targeted group (first bullet above). This effect has been demonstrated for years with many types of Direct Marketing. It works because actual behavior is better at predicting future behavior than demographic characteristics are.  You can tell whether a customer is about to defect or not by watching their behavior; once you can predict defection, you have a shot at retaining the customer by taking action.

2.  Active customers are happy (retained) customers; and they like to “win”.
They like to feel they are in control and smart about choices they make, and they like to feel good about their behavior. Marketers take advantage of this by offering promotions of various kinds to get consumers to engage in a behavior and feel good about doing it.

These promotions range from discounts and sweepstakes to loyalty programs and higher concept approaches such as thank-you notes and birthday cards. Promotions encourage behavior.  If you want your customers to do something, you have to do something for them, and if it’s something that makes them feel good (like they are winning the consumer game) then they’re more likely to do it.

In order to retain customers’ they must be active with you, if they are not, they will slip away and eventually no longer be your customers. Promotions encourage this interaction of customers with your company, even if you are just sending out a newsletter or birthday card.

The truth is, almost all customers will leave you eventually. The trick is to keep them active as long as possible, and to make money doing it.

3. Retention Marketing is all about: Action – Reaction – Feedback – Repeat.
Marketing is a conversation, as the ClueTrain Manifesto and Permission Marketing have pointed out. Marketing with customer data is a highly evolved and valuable conversation, but it has to be back and forth between the marketer and the customer, and you have to LISTEN to what the customer is saying to you.

For example, let’s say you look at some average customer behavior. You look at every customer who has made at least 2 purchases, and you calculate the number of days between the first and second purchases. This number is called “latency” – the number of days between two customer events.  Perhaps you find it to be 30 days.

Now, look at your One-Time buyers. If a customer has not made a second purchase by 30 days after the first purchase, the customer is not acting like an “average” multi-purchase customer.  The customer data is telling you something is wrong, and you should react to it with a promotion. This is an example of the data speaking for the customer; you have to listen.

This paper and the Drilling Down book are all about how to discover, manage, and listen to customer data. The data is speaking for the customer, telling you by its very existence (or non-existence) there has been an action (or non-action) waiting for a reaction.

4.  Retention Marketing requires allocating marketing resources.
You have to realize some marketing activities and customers will generate higher profits than others. You can keep your budget flat or shrink it while increasing sales and profits if you continuously allocate more of the budget to highly profitable activities and away from lower profit activities. This doesn’t mean you should ‘get rid’ of some customers or treat them poorly.

It means when you have a choice, as you frequently do in marketing, instead of spending the same amount of money on every customer, you spend more on some and less on others. It takes money to make money. Unless you get a huge increase in your budget, where will the money come from?

For example, let’s say you have 1,000 customers, and you have an annual budget of £1,000.  You spend £1 on each customer each year, and for that £1, you get back £1.10 in profits. That’s an ROI of 10%; you got back £1,100 for spending £1,000.

Now, what if you knew spending £2 each year on a certain 50% of customers would bring back £8 in profits. That’s a 400% ROI. Where do you get the extra £1? You take it away from the other 50% of customers.  You spend the same £1,000 total and you make back 500 (half the customers) x £8 = £4,000.

If you always migrate and reallocate marketing pounds towards higher ROI efforts, profits will grow even as the marketing budget stays flat.

You have to develop a way to allocate resources to the most profitable promotions, deliver them to the right customer at the right time, and not waste time and money on unprofitable promotions and customers. This is accomplished by using the data customers create through their interactions with you to build simple models or rules to follow. These models are your listening system, like the “30 day latency” model above. They allow the data to speak to you about the customer.

True Campaign ROI Links to LTV (Lifetime Value)
There are several ways ROI thinking is used in marketing.  Some people look at the ad spend versus the visits or clicks created, and reallocate spending to the highest ROI (lowest cost) areas, as measured by cost per visit or cost per click.

Others may be able to take it deeper, and turn an action directly into a monetary value using ad sales or purchases, calculating ROI on pounds spent versus profit generated during the campaign.

These “campaign management” applications of ROI thinking, while a good start, are very front-ended and representative of the Web’s early focus on customer acquisition. They are short-term oriented and don’t include the future value of the customer to the company in the thought process. Return on Investment is not a place in time; the notion of a “Return” almost always implies a longer time horizon.

Here’s what can happen with the campaign management approach to ROI. Let’s say one media/creative combination generates a low cost per action, but these customers fail to repeat the action.  They’re “one-timers”. Another media/creative combination generates a high cost per action, but the customers repeat this action over and over, generating additional profits with no additional costs.

If you are using the campaign management style of calculating ROI outlined above to administer this campaign, you could actually be responsible for ultimately decreasing the future value of your company. You would be allocating campaign resources away from the most valuable repeat customers, just because they have a higher initial cost per action!

The next step towards accurately measuring ROI comes into play when the Web starts to focus on customer retention.

With a customer retention marketing perspective, ROI takes into account the LifeTime value of the customer, that is, the net profit to the company as long as the customer remains a customer.

A High-ROI campaign starts off by acquiring the right customers, customers who will continue to contribute to the profitability of the company after the initial acquisition. ROI is the LifeTime Value of the customer divided by the acquisition cost. This is the definition of ROI most customer retention oriented companies use. It is a sequence of events and measurements over time, ultimately resulting in a marketing campaign being deemed High-ROI or Low-ROI.

The sum of all the LifeTime values of customers represents the future profits of a company. Understanding these metrics allows for accurate predictions of future profits and thus the valuation of the company as a whole. This kind of ROI thinking can be very similar to the financial idea of cash flow, with each customer contributing their own cash flow to the company over time.

So creating a high-ROI marketing campaign starts with understanding the LifeTime values of the customers the campaign will generate. You have to analyze the current customer base, look at customer LifeTime Value relative to how and where the customers were acquired, and target appropriately.

Customers coming from RON banner ads may have a lower LifeTime value than customers coming from newsletter sponsorships. If true, you would move most of the marketing budget out of RON banners and into newsletter sponsorships.

ROI thinking, when applied to retention marketing, means a migration over time from acquiring low LifeTime Value customers to acquiring high LifeTime Value customers. In this way, a marketing budget can remain flat or even decrease over time even as the value of the customers and business rises.

Let’s say you just don’t have the time or resources to do a LifeTime value analysis. Maybe you never tracked customer source and just can’t do the analysis. What are some of the keys to organizing campaigns along LifeTime Value ideas, given the lack of ability to determine LifeTime Value?

There are two issues: targeting the campaigns and measuring success.

Targeting on the Web, because of roots in the publishing business model, has been dominated by demographics.  High-ROI marketing is about ongoing customer behavior, not demographics.

The reality is, you want people to behave in a certain way: to buy, click, or visit. Outside of some narrowly focused pure publishing plays, if customers behave as you want them to, how important are their demographics? You would probably be surprised how many of your “best customers” are outside your “core demographic”. Demographics should play second to behavior when targeting for high-ROI marketing campaigns.

People tend to continue behavior they have established in the past. Using behavior to target implies finding people who do what you want your future customers to do. If you want them to click, find places to advertise where click-through activity is high, and address demographics secondarily. If you want them to buy, seek media known to be heavy on actual buyers, and address demographics secondarily. And this time, track the acquisition source and ongoing patterns of behavior for the customers you acquire.

The measurement of success, if you don’t have the time or resources to do a full LifeTime Value analysis, can be looked at in two ways:

1. Use proxies for LifeTime Value. 
The simplest is repeat buying / visiting. Do the customers coming from RON banners have a higher or lower repeat rate than customers coming from newsletters? For examples of other proxy metrics you can use without actually measuring LifeTime Value, see the article Tracking the Potential Profitability of B2C CRM Implementations at: http://www.jimnovo.com/CRMROI.htm

It’s based on this idea of proxies for LifeTime value and explains the approach in more detail.

2. Just pick any time period, say the past 30 days, and start tracking behavior. 
Customer value is relatively constant in the short term. Customers who are the most valuable at 30 days tend to be the most valuable at 60 days; customers who have low value at 30 days tend to have low value at 60 days. Just start tracking and readjust your horizon as you move along. As you’re doing this, you will begin to discover exactly what a LifeTime is for customers acquired from different sources.  Want a hint?  It’s shorter than you think.

Here’s the point, folks. You don’t have to over-complicate any of this. There is no absolutely right way to do it. The idea is to start doing something, anything, regarding measuring ROI over a longer time-frame than the point of acquisition of the customer. Utilising marketing automation as part of your demand generation toolkit can help you make great strides forward in campaign monitoring and measurement.

You’re already doing a good job with campaign optimization. Just follow through and tie acquisition source back to the customer behavior over time, using any metric you consider valuable to your company. You will end up driving an increase in revenue while reducing the overall cost of acquiring and retaining customers.

The future value of customers can be predictably determined by looking at media source, product of first purchase, time of day, affinity profiles, and many other “triggers”.  This is the first step towards improving customer retention – measuring the value of customers acquired by source.

After measuring customer group value, the next step is to manage customer value – to make money by creating very high ROI customer marketing campaigns and demand generation programmes. The Drilling Down book describes how to create future value and likelihood to respond scores for each customer, and provides detailed instructions on how to use these scores to continuously improve profitability.

 

© E Partridge

Eddie Partridge is Sales Director at Panovus Limited and a technology industry veteran. He has a big Black Book and his memoirs could make your hair curl.

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